Local Networks and New Business Formation

ABSTRACT New business formation is a key driver of regional transformation and development. While we know that a region's attractiveness for new businesses depends on its resources, infrastructure, and human capital, we know little about the role of local business networks in promoting or impeding the birth of new firms. We construct local business networks connecting more than 350 million nodes consisting of managers, owners, and firms using data on the universe of German businesses. Differentiating between firms founded by serial and de novo entrepreneurs and different network measures (average degree and transitivity of the largest component), we show that the connectedness between actors within a region matters for firm entry and individual firm performance. We show a positive relationship between a region's connectedness and firm entry by serial entrepreneurs. Networks are also linked to individual firm performance, especially in terms of larger entry size of de‐novo firms and higher employment growth for both de‐novo and serial entrepreneurship.